PETDAG’s 1QFY23 results beat expectations due to strong  volumes and favourable product prices. Moving forward, volumes  may be hurt by the implementation of targeted fuel subsidies. On  the flipside, the resumption of international flights may boost commercial fuel volumes. We raise our FY23F and FY24F net profit by 27% and 6%, respectively, lift our TP by 4% to RM24.90 (from RM24.00) but maintain our MARKET PERFORM call.

Soaring volumes led to earnings beat. 1QFY23 core net profit of  RM301m beat expectations, coming in at 36% and 37% of our full-year  forecast and the full-year consensus estimate, respectively. The  variance against our forecast came largely from stronger-than-expected  sales volumes, particularly at the retail segment.

Dramatic turnaround at the commercial segment. 1QFY23 bottom line more than doubled YoY following a 13% surge in sales volume.  This was underpinned by higher retail demand (+15%) due to the festive  season and school holidays. Furthermore, commercial volumes spiked  by 10% post-opening of international borders since 2QCY22.  Correspondingly, this boosted Jet A1 volumes and enabled a  turnaround in EBIT contribution by the Commercial segment. The  above, coupled with lower taxes and opex, led to the improved  performance. This was in spite of subdued average selling prices (ASP)  (+1% YoY).

Product price fluctuations worked to PETDAG’s advantage. On the  other hand, QoQ expansion (+66%) was driven by the retail segment on  the back of: (i) lower product costs, and (ii) 1QFY23 price trends that moved in PETDAG’s favour. Additionally, to a lesser extent, earnings  received a kicker from lower opex at the Convenience segment. The  above more than offset drag from lower volumes (-2%) and ASP (-7%).

Possible setback from targeted fuel subsidies. Moving forward, we  are concerned of volume downside risk for PETDAG. This is given the  government’s plans to implement targeted fuel subsidies next year. Following this, volumes may suffer a setback in the immediate term.  Whilst we believe demand is elastic over the longer term, there may be  a knee jerk reaction, resulting in lower consumption. Moreover, public  transportation is emerging as a viable alternative given improved  coverage and connectivity of mass transit lines, coupled with sustained  government subsidies.

Beneficiary of revival in tourist arrivals. On the other hand, there is  room for earnings expansion, as we believe that Jet A1 volumes have  yet to revert to pre-pandemic levels. The company expects a revival of  Malaysia’s tourism industry in 2023 will propel aviation fuel volumes.  This is underpinned by projections that international air passenger  arrivals in Malaysia will surge to 9.6m in 2023 (2022: 2.9m). In turn, this  implies an increase in international flights, and hence consumption of  aviation fuel. Therefore, volume growth traction for the commercial  segment is expected to sustain in 2023 (2022: +20% YoY, 2021: -50%  YoY).

Forecasts. We raise our FY23F and FY24F net profit forecasts by 27% and 6%, respectively, to reflect higher sales volume  assumptions.

Correspondingly, we lift our TP by 4% to RM24.90 (from RM24.00) based on DCF valuation with a WACC and terminal  growth assumptions of 10% and 1% respectively. There is no adjustment to our TP based on ESG given a 3-star rating as  appraised by us (see Page 5).

We like PETDAG: (i) for the stable demand for fuels as the economy normalises, (ii) given its strong balance sheet with a  huge war chest of RM2.8b and stable dividends, and (iii) for its strong shareholder, i.e. the national oil company Petronas.  However, its valuations are fair with limited re-rating catalysts. Maintain MARKET PERFORM.

Risks to our call include: (i) the full removal of fuel subsidies for all income brackets, (ii) the global economy slips into  recession and derails recovery of international air travel, and (iii) weak tourist arrivals.

Source: Kenanga Research - 23 May 2023